Tag Archives: Economic growth

MMT and Economic Growth

Most economists , including the MMT variety, are wedded to the notion that economic growth in itself is a good thing. Of course, it has indeed been that over the last centuries. Few of us would be happy living under the same conditions as our 19th century forebears for example.Looking at inscriptions on the headstones of an old cemetery, or the reading of a few chapters of a Dickens novel provides enough evidence of the harsh living conditions that most endured then. Infant mortality was high. Many women died in their prime due to complications of childbirth. Improvements have largely been made possible by economic growth. In our modern economies we notice that unemployment falls when economies grow. Workers can negotiate higher wages as businesses can sell their products and services into marketplace. Everyone is happy. Governments get re-elected!

Economic growth is largely a product of human ingenuity. Give a group of workers the task of doing something, like making a car for example, when they have no experience of even seeing a car before and they’ll struggle to do it. The cars they produce won’t be very good. They will consume a lot of labour power and be relatively expensive, so that only the very wealthy can afford them. That was the case in the early years of the car industry. But as the workers gain more experience and apply their intelligence to the problems at hand, the cars are continually improved. The labour time to make each one falls as production techniques improve too. Fast forward to where we are now, and we have very good cars made very efficiently by far fewer workers at a fraction of the cost of a century ago. It is the same story in just about every industry we can think of.

Those in the Green movement question that we can have economic growth forever citing the fact that economic growth implies an exponential consumption of the finite resources which are available to us. It’s a good question and it’s one we are going to have to answer sooner or later. We might want to make a start on doing that now in the context of our present economic problems. In the UK and Europe we have seen no real economic growth since the 2008 GFC. The situation varies from country to country but typically GDP per person is just about what is was a decade ago. Even so, this is still approximately twice what it was a generation ago. So is everyone twice as happy now as they were then? Or are they exactly as happy as they were a decade ago?

Of course they aren’t. There’s much more unemployment and underemployment now. There are more homeless people than there were, there aremore people relying on food banks. The state of the NHS and the education system is worse than it was. In 1980, students still had grants, but now they don’t, even though supposedly we are a much wealthier society, notwithstanding the difficulties brought about by the 2008 crash. This is not what I remember being told by Sir Keith Joseph ( a Tory politician very close toMargaret Thatcher) in the early 70’s when we clashed at a student meeting where he was speaking. He criticised me, in particular, and the left in general, for being overly concerned with the redistribution of existing wealth and not enough about the creation of new wealth. His message was that social and economic problems, of which we were both aware existed, were best solved by having a more productive economy and allowing the wealth creators free rein to create wealth unhindered by State interference. It would have been inconceivable to the rest of the meeting, and maybe even to Keith Joseph and myself, that some 40 years later we’d have had the levels of growth we’ve had but still the same economic problems would remain unresolved.

We don’t need degrees in economic theory to know that if the proverbial ‘economic cake’ is much bigger but there are still those surviving on meagre rations, that the imbalance must be due to how that cake is cut. The question of who gets what does matter when discussing Economics. Economic growth has to be more than about mopping up surplus labour in a capitalist economy. If we do achieve some growth, that’s fine, we all can feel a bit better off. If we don’t, we should all feel that we are neither better nor worse off, instead of, as now, feeling that we have to run just to stand still. Do we need a different type of economy for that to happen? The critics of MMT might argue that it’s little more than a patch for the problems of a capitalist economy. I wouldn’t accept that but we do have to explain how MMT can work for everyone if we are to establish meaningful links with the political left. A Job Guarantee on a minimum wage won’t be enough for many.

If we do want that, we have in the words of Labour’s old Clause 4 to provide an economic theory which can help to “secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof”.

 

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Never mind the deficit just vote for the recovery!

It’s difficult to know who to back in next month’s UK elections. Europe is a major issue which the most normally sensible parties, or at least the parties who the public normally consider to be the more sensible,  have largely chosen to ignore  in the run up. The events in the eurozone are highly significant, in particular the Greek crisis,  yet those in the most pro-EU parties don’t want to talk about them at all.

There’s next to nothing about it on Labour’s main website, Labourlist, for example.

Funny that!  Those who believe in a united Europe, as many of our more ardent EU advocates clearly do, should feel as strongly about unemployed young people in Spain or poverty in Greece as about hardship in the UK.  Yet, if they ever remember to make a critical comment, it is not because they wish to change anything. The just expired Parliament has seen a complete absence of Labour opposition to any new laws or powers for the EU.

If the UK today had 50% youth unemployment as the south of Euroland currently suffers, Labour would never let us all hear the end of it – and rightly so. If the UK had Greek levels of unemployment, and a Greek cost of living crisis which has depressed average real incomes by almost a quarter since 2007, again we would not hear the end of it, as Labour would rightly think it completely unacceptable. So why is it that these people who believe in pan European solidarity have nothing to say about the scandal of poverty and joblessness in large chunks of Euroland? Why are they not insisting on new policies for the EU?

The situation is far from ideal but it’s probably best to vote for the party who you feel will produce the best recovery. The recovery, when it happens, will fix all deficit problems. Firstly a healthy economy will mean increased taxation revenue. Secondly, if the economy is healthy no-one is going to worry about debts and deficit anyway. The US$ is surging at present as investors buy up $ securities. Are they worried about a $17 trillion (or is it $18 trillion by now?) debt?

I don’t think so. There are those in the USA who can’t make head nor tail of it all and are pushing for a balanced budget. I can’t see them getting anywhere but heaven help us all if they do!

Greek debts cannot be repaid in euros!

If debts cannot be repaid they will not be repaid. Debts, in the commercial world, usually end up being settled. If they aren’t settled it is nearly always because debtors cannot pay rather than because they have chosen not to pay. There is a well recognised procedure , in civil law, recognising this truism, which can end up in the bankruptcy of the debtor if a suitable settlement with creditors cannot be satisfactorily negotiated.

Bankrupting a country, like Greece when it gets into financial difficulty,  however, is not a political option. Unless we want to start another war between Greece and Germany that is! So what are the options? Apart from carrying on, in both senses of the term, in the the present irrational manner there is only one.  If Germany (plus other countries such as Holland who also own Greek debt)  requires Greece to repay its debts,  Germany has to recognise that Greece has to pay in something other than euros, at least not directly, as it clearly does not have anywhere near enough and has fewer now after the application of the supposed economic remedy (punishment?) by the troika than it had previously.

 

ouzo_12 feta olives

 

Therefore, it has to pay in real goods and services:  Tourism. Olives. Feta cheese. Ouzo. Shipping. Whatever Greece makes, does and sells, Germany needs to buy to enable the debt to be settled. And it needs to buy more from Greece than it sells to Greece. That way Greece ends up with the euros, which pays the Greeks for growing the olives, running the tourist hotels, making the cheese etc . This enables Greece to provide jobs for the unemployed, improve its Government’s tax revenue base,  grow its economy, and also enables the Greeks to service, and eventually settle, their German debts.

The same naturally goes for Spain, Italy and even France. In other words, German debts get repaid when, and only when, Germany decides to accept real goods and services instead of euros. This in turn means that Germany has to run an economy more along the lines of the UK and the USA economies and import more goods and services than it exports.

If Germany and Holland don’t want to accept the reality of the situation, it is they who should exit the Euro not Greece or Spain.

Some Humour;

http://www.thedailymash.co.uk/news/international/greeks-apologise-with-huge-horse-2012051527146

http://www.thedailymash.co.uk/news/international/greeks-vote-to-stop-having-shit-kicked-out-of-them-2015012694755

Want to make your business card worth something? Easy. Start a protection racket!

An interesting experiment is take out a bank note from your wallet or purse and ask your friends and family , “Why does this piece of paper have value?” You’ll get a range of answers. Some people may think “gold”. They will be completely wrong. There was a time when they would have been right. Once you could demand a fixed weight in gold in exchange for a pound or a dollar, but those days are long gone. Some may say “ Because you can buy things with it” — an answer that only begs the question! “Faith” will be another possible answer. Everyone will accept it because everyone else will!

There is the “because it is legal tender” argument. But, do we all do what we are supposed to purely because the law may require it? Do drug dealers happily accept cash, in dollars or pounds, for their wares because they are concerned to comply with legal requirements?

There must be another reason.

Suppose I wanted to establish my own currency. I’d start with a collection of business cards or even old Christmas cards, and write on the back of each one, 1 Martin, 5 Martins , 10 Martins etc. How would I ensure they were worth anything?. I could promise everyone that each ‘Martin’ would be redeemable for $1 or £1. If I was sufficiently well regarded in the neighbourhood then that would work, up to a point. That’s exactly what some countries do. They peg their currencies to another currency, usually the US$ or the Euro. These currencies work on the basis of an IOU.  However, if confidence is insufficient in the ability of that country to maintain the peg then speculators move in to try to make a killing by forcing its value down. It can be a dangerous game to play as many countries have found to their cost. If I can’t redeem the IOU at what I promise then technically I’m in default.

So what else could I do? Legally not much. But, if I were unscrupulously, not to say criminally, inclined, I could start a protection racket. I’d tell all my neighbours there was a problem with gangs of hooligans who came into the area at night to break windows and damage cars etc. I’d offer to protect everyone but the cost would be a signed business card of 5 Martins or however much I considered each person and household could afford. They would want to know how to acquire my signed business cards and I’d suggest they could paint my house, mow my lawn or clean my car or whatever. My signed business cards would acquire a value to me. I’d get work done for nothing! People from out of the area, who weren’t covered by any offer of protection would also work for me to acquire the Martins and either sell them to those who were in need of protection, or exchange them for an agreed value of goods and services. My business cards would be just like money. I’d be have to issue just enough Martins to enable my neighbours to acquire the cards at not too great a cost but not too many that they started to lose their value!

Martins would have an exchange rate! I would naturally keep an eye on what that was and use fiscal policies to control its value. My business card would still be an IOU but this time it would be a much vaguer IOU. There would be no guarantee that a ‘Martin’ would be worth anything other than 10% of 10 Martins.

Whereas everyone else would think of Martins as money, to me, as an issuer they would be useful but I wouldn’t view them in the same light as users of Martins. There would be no point in saving them up, for example, just in case I was short of them at some time in the future. I’d always be in debt in the sense that I’d always have issued more Martins than get returned to me. Would I have to balance my budget and only spend, in Martins, what I received in Martins? No of course not!

If I were arrested and thrown into jail then my cards would be instantly worthless. If another racketeer took over my patch he might, to establish some form of ‘customer relationship’, offer to redeem some of them but he would not have to.

My neighbours will be pleased to know that protection racketeer isn’t exactly my choice of profession. I’m not confident I’d be able to frighten people sufficiently to keep their mouths shut!   But governments aren’t similarly constrained. They send us tax bills so we can pay for their protection from all sort of threats, both real and imagined. If we don’t pay we don’t get our windows and cars damaged but we do run the risk of being jailed! Libertarians probably like the idea that Governments run legalised protection rackets. Liberals and Socialists less so but that’s essentially the way things are. It is the power of the State which gives the $$ and ££ their value.

So whereas Bob will take a £5 note or a $5 bill in payment from Ann because Bob knows that Col will take it from him, it cannot be an infinite chain. The chain is possible because at the end of it, Zoe has a tax bill to pay. It maybe a TV licence or car registration, and she needs that £5 note to help pay it.

If a government ceases to exist, for any reason, as happened when East Germany dissolved itself in 1989, its currency becomes worthless. There’s no need to pay the protection money, sorry taxes, any longer! The new racketeers, sorry the new unified German Government, weren’t completely heartless though. They did offer to exchange Ostmarks for Deutschmarks up to a certain value!

Nationalisation Costs Nothing and Privatisation Raises Nothing!

There is some discussion in British Labour Party circles on the question of bringing the railways, and other key industries, back into public ownership. Those opposing the idea usually argue along the lines of “we can’t afford it”. They say the capital, or money, required would be far better used on housing, education and other growth promoting projects.

They either don’t understand the economics or they are deliberately misrepresenting them to suit their own nefarious political purposes.

Apart from the administration costs of making it happen,  renationalising the railways, or nationalising any other industry, in Britain, or anywhere else, costs nothing. This must be true when you think about it. Otherwise, how possibly could they have been nationalised in the first place, by the Attlee Labour government, immediately after WW2 when the country was said to be virtually bankrupt?

It works in the same way as QE. Before the repurchase of railway shares, or whatever else such as govt securities from the banks in the case of QE, there are two zeros on either side of the balance sheet.

After the repurchase, the assets of the shares or securities, on one side of the balance sheet exactly equal the liabilities , created by any payments, on the other. So the balance sheet still balances. You can’t do this, and I can’t do this but Government is an issuer of its own currency, and it is really no problem at all.

Conversely, it must be true that if nationalisations cost nothing, then privatisations don’t actually raise any extra usable money either. And they don’t. The recent sale of the Post Office/Royal Mail  in the UK didn’t raise a single extra spendable penny!

Warren Mosler’s 7 Seven Deadly Frauds of Economic Policy #7

“It’s a bad thing that higher deficits today mean higher taxes tomorrow.”

This is perhaps the only common neoliberal argument where there is at least some measure of agreement between their view and the MMT view. Except, whereas the neoliberals would say its a bad thing that the higher deficits need to be ‘repaid’, the MMT argument would be that it would be  a good thing if the higher deficits means that the economy starts to work at slightly too close to full capacity and has to be later slowed down by the imposition of higher taxation to prevent inflation.

It was Prof Wynne Godley who first made the observation that taxation in an a economy using a non-convertible currency with a freely floating exchange rate is not at all necessary to raise funds for government to spend. It, together with the amount of government spending, need be considered only as a way of regulating the economy.

So, if the deficits now do cause taxes to rise later, then that’s a good thing providing the deficits now aren’t overdone and inflation really does have to be reined back sharply. There’s not much danger of that at the moment in the major economies. The big danger is the other way ie recession and a lack of purchasing power, or insufficient aggregate demand.

My takes on the first six “deadly frauds” are on links in the right hand column together with a link to Warren Mosler’s book which is freely available in pdf format.